Factoring and Bank Lending
I signed a client this month that was using his local community bank to cash flow his business. They had done a great job over the past few years but after his business doubled in sales the bank was unable to extend the credit he needed to grow even more. This has become much more prevalent in the trucking industry over the last few years due to the downturn in the economy and the tightening of the credit belt. After reviewing our freight factoring programs, our new client learned that he can grow his business to any size he wants and he was happy to give us a try.
Traditional banking is a great way to generate an operating line of credit. These credit lines come in many different forms; the forms I run into the most are:
Personal loans require personal property or collateral to be pledged to guarantee the ability to repay the debt. Often times a personal loan is acquired by pledging real estate owned by the individual guaranteeing the loan, such as a home. The amount you can borrow is limited to the value of the collateral. All banks have different ways of underwriting risk, so you could expect to be able to borrow between 50% and 80% of the value of the collateral pledged.
Business Operating Line of Credit
A business Operating Line Of Credit is probably the most popular form of bank lending for businesses and it is very similar to the personal loan above in that several forms of collateral are needed to secure the line of credit. And like the personal loan, the amount of the credit line is limited to the amount used as collateral.
Accounts Receivable Line of Credit (ARLOC)
An Accounts Receivable Line Of Credit (ARLOC) is the most similar product to factoring that a traditional bank has to offer. With the ARLOC, the client submits lists of invoices (also called a schedule) that were sent to their customers and the bank will allow the client to borrow up to 80% of the invoice amount on the schedule. With these accounts, the customer will pay the client by sending money directly to a lock box at the bank so the bank can keep control of the incoming cash.
In fact, many bankers will argue that their loans are set up as a combination of all of the above; a personal loan, a line of credit and AR line of credit could all be used to generate a credit limit that you can utilize to run your business. And they would be right in that argument.
However, the main difference between a factoring company and traditional bankers is this:
- TIME needed to close the deal, sign paperwork and get the line of credit in place
- BANK: This can take weeks, if not months. The bank will need to review years of financial information on the company as well as get appraisals on all of the equipment or real estate used as collateral. Plus, you will pay for the appraisals.
- FACTOR: We can underwrite and have an account ready for funding in 24 hours
- CREDIT LIMITS
- BANK: Credit limits will be limited to existing valuations of the company. If the company grows, it doesn’t necessarily mean that the credit limit will grow.
- FACTOR: The credit limit is only limited the amount of sales you can generate. If the company doubles in size, so does the credit limit.
- EASE OF USE
- BANK: the bank will require that you submit quarterly financial statements and your credit lines can be adjusted down if you are not performing as needed.
- FACTOR: We do not review financials and your program is not subjected to a quarterly microscope
- ADVANCE RATES
- BANK: Banks are traditionally limited to lending 80% of the invoice amounts
- FACTOR: We will advance up to 95% of an invoice amount
- EXTRA SERVICES
- BANK: None
- FACTOR: Billing and collection services, credit monitoring services, accounting services, accounts payable services.
At the end of the day, you have to decide what works best for your situation. For most companies that are growing at a rate of 25% a year and more, traditional banking just doesn’t work. The credit limitations combined with the stress and workload needed to keep the bank informed quarterly can be too overwhelming.